Managing Receivables: A Key To Improving Cash Flow

Managing cash is critical to the success of any business. Whether you are providing a good or a service, it is important to make sure cash flow allows for day-to-day operations and growth.

As a business owner, you never want to find yourself in a position where you can’t meet critical payments for payroll, taxes and key vendors ― especially if money is tied up in outstanding invoices that the company is awaiting payment on. The good news is managing cash can be easy; and it all begins with managing receivables.

Set credit limits

A major part of managing receivables has to do with setting credit limits. Before selling goods or services to a new customer, do your homework. This includes ordering credit reports, checking credit references and asking others that may have experience with the potential customer. You may want to consider selling on C.O.D. until you have established some payment history before extending terms. This will help ensure that your business is not accruing unpaid debt from a company that has no intention of making a payment.

Create credit policy

Every business should have a written credit policy in place. This will help make sure that collections are done in a timely, consistent and organized manner. It also ensures that employees are following a set standard while eliminating surprises and keeping management in the loop.

Stay connected

Staying in contact with customers is critical. Initiate calls to ensure the customer has received the product or service; call if the invoice becomes past due, and execute a follow-up call for payment status. Don’t be afraid to request payment if the invoice starts to stretch.

Should the customer fail to pay after these attempts, enlist the help of an attorney to demand payment. Staying in contact with the customer and maintaining the relationship can actually decrease the amount of time it takes for an invoice to be paid. Ultimately, building a rapport and keeping the lines of communication open will significantly increase cash flow.

Offer cash discounts

Offer clients a discount if they pay early. This creates a win-win situation for both parties because the customer saves money and you get cash faster. The discount amount should be well thought out. Too high of a discount will cause a serious erosion of margin and too low may not encourage a client to pay in advance.

Provide choices

Although this may seem obvious, it is important to make payment as easy as possible for customers. Limiting the ways that they are able to pay can cause customers to put it off for as long as possible. Consider allowing customers the option of paying with a credit card or online with an electronic payment, instead of by check.

Send the bill

Once the product is delivered or the service is provided, invoice immediately. The sooner you bill, the sooner you can get paid. It is also important to make sure all information to support the invoice is completely filed in case the client has a dispute. This reduces the opportunity for the customer to hold up payment and provides a greater chance of receiving payment as soon as possible.

While receivables are one way for business owners to increase cash flow, others things to consider include equipment and inventory control, operating procedures, vendor relationships and operating expenses. By taking a look at receivables first and incorporating the recommended practices into your accounting operations, your cash flow situation can quickly go from negative to positive.